Malaysian bonds may have performed best, but a shrinking economy means that more will come.

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With the recent bond sales, demand has fallen to a minimum this year.
Investors are betting that Bank Negara Malaysia will cut borrowing costs for the 5th consecutive year.
Malaysia’s economy fell to a record low of 17.1% year-on-year in the last quarter.

Thanks to successive interest rate cuts, Malaysian bonds have performed best in the Asian market this quarter. But deflation, falling expectations of further rate cuts and an uncertain economy mean that more is yet to come.

A senior interest rate strategist at Australia & New Zealand Banking Group Ltd in Singapore stated in a research note

“We expect bond yields to have reached their lows this year. Malaysia’s political background has also proved unstable this year and could create uncertainty about political continuity”.

Declining demand

Investors are betting that Bank Negara Malaysia will cut its borrowing costs for the fifth year in a row, following a 125 basis point drop in its benchmark this year. It is important to note that other positive aspects supporting the bond rally could lead to an increase in foreign inflows.

Referring to the sharp drop in GDP in the Malaysian economy, Brian Tan, a regional economist at Barclays Bank in Singapore, said

“It is not clear that there is necessarily a hard bottom for the key interest rate in Malaysia. The resurgence of Covid-19 in Malaysia’s main export markets such as the US threatens to curb foreign demand”.

Auctions of conventional Malaysian bonds have continued to decline and yields on three-year benchmark bonds have fallen by almost 40 basis points, after falling 75 basis points in the first half of the year.

Previously, Malaysian conventional bonds had outperformed the rest of Asia due to the Central Bank meeting on July 7th, where interest rates were cut to combat the effects of COVID-19. Now that the Malaysian government has lowered its benchmark this year by 125 basis points to a record low of around 1.75%, traders are beginning to lose confidence if there is still room for maneuver.

Malaysia’s economy fell to a record low of 17.1% in the last quarter compared to last year. However, the economic slump exceeded the median of a 10.9% contraction forecast in a Bloomberg survey.

Despite Malaysia’s gloomy attitude, global funds were channelled into the country’s debts. It is also important to note that Malaysia’s total net inflow in the three months to July is $4 billion, almost more than the cumulative outflow of $4.7 billion three months earlier caused by the COVID 19 pandemic.

Malaysian traders can rely on the level of bond yields in the developing markets, which are approaching record lows. Speculative foreign inflows and deflation are positive as the central bank seeks to provide the best support.

Forthcoming Expectations

According to Marcus Wong, here are some observations on the Asian bond markets:

Thailand will announce its GDP for the second quarter on Monday; it will give an insight into the full impact of COVID-19.
The Bank of Indonesia will make its monetary policy judgement on Wednesday after cutting interest rates at its two previous meetings.
The Philippines will announce balance of payments figures on Monday and sell 10-year bonds the following day.
Malaysia’s August inflation figures end on Wednesday after the country experienced deflation in previous months.

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